Strides Arcolab stock: Growing portfolio to bear fruit in foreign markets

The stock of Strides Arcolab gained about 8 per cent this week on product approvals. This, coupled with its growing product portfolio, should meaningfully reflect on the US sales. Steady growth in Australian market and its branded generics in the rest of the world are the key triggers for the stock, which was an underperformer (down 37 per cent) over the last year.
 
The immediate trigger is the approval for the company’s products in the US market, where it is trying to build a base. The company has received an approval for a generic version of the HIV drug Sustiva, which has a market size of $115 million. As it is a two-player market, analysts said the company will be able to generate revenues to the tune of $7-8 million. Given the company’s low base, this is a significant opportunity.
 
With a portfolio of niche generic products, competition, price erosion and legal challenges are expected to be limited. Products such as methoxsalen (skin ailment), carisprodol (muscle relaxant), ergocalciferol (vitamin D) and complex products such as a generic version of Urocit (kidney stone treatment) and Lovaza (lipid regulating agent) are such products.

The company has major market shares in the first three drugs, ranging from 33 to 85 per cent. What should add to the sales growth is the fact that the company received 14 approvals this year to date, compared to six in 2016-17, with total cumulative filings with the US FDA at 74.
 
Analysts at Antique Stock Broking estimate Strides Shashun’s US revenues doubling from 2016-17 levels to about $230 million by 2019-20. Further, analysts at Motilal Oswal Securities say better compliant manufacturing sites compared to peers means there was minimal regulatory risk for the company in the US.
 
The other major market which should help the company boost its overall sales growth is Australia, where it is the third-largest generic player.
 
Shifting the manufacturing base to India for half of its products, launch of new products, and a supply agreement with Pharmacy Alliance, the largest cooperating buying group, are expected to improve the compmay’s margins from the current 20 per cent to 25 per cent over the next couple of years.
 
Given higher overall margins, robust revenue growth, and falling debt, the company is well-placed to show superior performance in the next couple of years.